Investors with high hopes for cannabis

Seibo Shen made a lot of money in tech – he was an early employee at four startups that were acquired or went public. But for his latest venture, he didn’t just want to “add another zero to my bank account.”

He wanted to rekindle that startup thrill while selling a product he truly cared about.

So the 38-year-old San Franciscan raised $500,000 to get into the cannabis business. Now, instead of working accounts for months to sell software to businesses, Shen is hawking $650 marijuana vaporizers for his new company, VapeXhale.

It’s a lot quicker to close a deal these days.

“Instead of a 12-month sales cycle, it’s the one-puff cycle,” Shen said, motioning at a glass vaporizer at his company’s booth at a cannabis-industry investor conference this week in San Francisco. “After you try one puff, you’re sold.”

Fueled by many of the same reasons they got into tech, an increasing number of Silicon Valley veterans are investing in the booming cannabis market. As the tech market matures, the fledgling marijuana industry offers a hint of the old startup days, where innovators can write the rules as they go.

And just as techies have long mused, some believe their work will change the world.

The tagline for the ArcView Group’s high-worth pot investors’ conference underscored the mood: “Invest in the Next Great American Industry.”

A year ago, ArcView, a marijuana data and analysis firm, held its gathering in Las Vegas at the D, a hotel where a room goes for $24 on a Wednesday night. This week, the two-day conference was at the Fairmont, where U.S. presidents have regularly bunked.

There the savviest of investors tried to secure their place early in what they believe will be a green gold rush. California voters will likely have the chance to legalize recreational cannabis for adults on the 2016 ballot, and early polls show strong support.

The marijuana market has boomed 74 percent over the past year to $2.7 billion, with California – where only medicinal pot is legal – accounting for nearly half that, according to a report this week by ArcView. If pot were legalized in California next year, ArcView projects that “the entire industry could rapidly double in size.”

Inside the Fairmont, it wasn’t hard to smell the opportunity. Kevin McCarty, the fourth employee at the social network Yammer, was seeking funding for Eaze, an on-demand weed delivery service dubbed “the Uber for pot.” Prowling the halls was Tom Bollich, a co-founder of the video game titan Zynga whose new startup, Surna, sells chilling systems used to grow marijuana.

Monday’s keynote speaker was Justin Kan, the San Francisco entrepreneur who recently sold his streaming video game service, Twitch, to Amazon for $970 million. Now he wants to get into the cannabis business, as he sees “a lot of parallels to the technology industry” – like how you can get a lot of grief for being far ahead of the curve.

Before Twitch took off, critics said watching other people play video games was “a crazy idea,” Kan told the crowd. “So I guess I’m a real believer in crazy ideas.”

Compared to your average tech startup, the cannabis business has one huge advantage: There’s no lack of demand. “People are breaking the law to buy your product,” Kan said.

Marijuana’s questionable legal status has led to hesitance from traditional Silicon Valley investors. Even though venture capitalists are famous for taking risks, there is a reluctance to invest in marijuana, which the federal government classifies as a Schedule 1 drug on par with heroin. Many venture capital firms have outright prohibitions against investing in “sin” products like pornography, alcohol, tobacco, firearms and illegal drugs.

And legal uncertainly remains: Medical marijuana is available in only 23 states and Washington, D.C., and recreational marijuana is legal in only two states, Washington and Colorado.

When he was hunting for investment for his distilled cannabis company, Ebbu, former video game industry executive Dooma Wendschuh said a potential longtime tech investor “was so worried about the optics of it that he wanted to form a separate LLC before he would do anything.”

Wendschuh, who co-founded Sekretagent Productions, makers of the popular “Assassin’s Creed” series, feels no such reticence. When he was considering selling his share in the game company, Wendschuh told conference-goers, “It was not an easy choice. But the thing that pushed me over the edge was the realization that nearly every truly visceral moment in my adult life, everything that I am most proud of … all involved some form of psychoactives.”

Slowly, the big tech investors are following him into the deep end. This month, the Founders Fund, an investment firm started by PayPal co-founder Peter Thiel, joined a $75 million round of funding in Privateer Holdings, which has several marijuana company investments.

Some tech expats say you don’t even have to break the law to cash in on the boom.

Jessica Billingsley and Amy Poinsett turned their web developing and IT expertise into MJ Highway, which sells software to marijuana businesses. Five years after they started, they have 25 employees and more than 1,000 clients in 18 states.

“Our geek skills were very much in demand here,” Billingsley said.

As big money moves into what for decades was underground economy, ArcView Group president Steve DeAngelo urged the investors and entrepreneurs to heed what he considers the longstanding values of the pot world: inclusion, diversity and a respect for nature.

“Cannabis is a gift from the hippies, like yoga and personal computers,” he said.

When people look back at the early days of the marijuana business, they should be able to say that “we didn’t just create a new industry, but we created a new kind of industry,” DeAngelo said.

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